Real Estate and Rental and Leasing

Types of Real Estate: Definitions and Differences

The real estate industry is vast and diverse, with different types of real estate properties across different categories.

If you’re here, you likely want to learn more about the different types of real estate and the criteria that differentiate them. If so, you’re in the right place!

In this article, we explore the two main categories of real estate—residential property and commercial property—and the different types of real estate properties within each category.

The Two Categories of Real Estate Properties

There are two categories of real estate property: residential real estate and commercial real estate. Each category has different types of real estate that serve different purposes.

Commercial vs. Residential Real Estate Investing

While it’s easy to think that all real estate is simply real estate, there are key differences between commercial property and residential property that you should be aware of because they have different implications.

Residential properties consist of single-family homes, condos, and small multi family houses with four or fewer units—all primarily used as living spaces.

Commercial properties consist of all income-producing property and larger multifamily buildings with five or more units. Let’s look at the types of property in each category.

Residential Real Estate

Residential real estate consists of properties used primarily for non-income-generating residential purposes. This means their primary intent is for people to own them as homeowners and live in them as their primary residences.

However, just because the primary intent is for people to live in them as homeowners doesn’t mean a residential property can’t be a great rental property.

Residential properties can become rental properties as soon as an investor acquires one and rents it out to tenants.

Here’s a look at the three different types of real estate in the residential category:

1. Single Family Homes

Single-family homes are some of the most common types of real estate in the United States. They usually consist of a yard, a few bedrooms, a couple of bathrooms, a kitchen, and a living area. The main intent for a single family home is for an individual family to live in it (hence the name).

A single family house is usually purchased to serve as the primary residence for a family and is valued based on similar sales prices in the housing market.

However, it’s also possible for property owners to lease their home and generate cash flow from the rental income.

2. Condos and Townhomes

Condominiums, commonly called condos, and townhomes are another popular type of residential property.

Condos and townhomes offer similar benefits as a stand-alone house, but are usually connected to other like-kind units. For example, a condo building may have 100 condos in it, or a townhome development may have four townhomes that share walls with one another.

One of the main advantages of condos and townhomes is their affordability. Since there are more units on a single property, the price per unit usually decreases.

3. Small Multifamily

Small multifamily properties are buildings with two to four units.

Each unit often has its own entrance, living area, bedroom(s), bathroom(s), and kitchen. Some small multifamily units have their own outdoor space, but more often than not, the outdoor space is shared amongst all of the tenants.

The four unit distinction is key because you can purchase a small multifamily property with a residential loan for as little as 3.5% down. However, if the multifamily building has five or more units, you will have to use a commercial loan which usually requires a minimum of 20% to 30% down.

Speaking of commercial loans, let’s transition to the different types of commercial real estate.

Commercial Real Estate

Commercial real estate is a much larger category of real estate that covers everything from shopping malls and strip malls to medical centers and mobile home parks.

The common element amongst commercial property types is their use is for income-generating and business purposes as opposed to being a primary residence.

Here’s a look at the different types of commercial real estate:

1. Commercial Multifamily

Commercial multifamily real estate includes apartment buildings with five or more residential units, with some even having hundreds of units.

These multifamily properties are considered commercial and not residential because they often cost significantly more than the average single-family home, condo, or small multifamily. As a result, it’s usually only economical for investors to purchase these properties and rent them out instead of purchasing them as primary residences.

After all, an individual isn’t likely to purchase a 300-unit multifamily property to only live in one unit and not rent out the others.

2. Office Space

Office real estate is an essential part of the economy because many businesses prefer to have all of their equipment and employees centralized in core locations for multiple reasons, including security, collaboration, communication, professional relationships, and efficiency.

Office buildings can come in many shapes and sizes. Some office buildings are leased out to a single company, whereas others are leased out to multiple companies that share common areas and other facilities. For example, businesses such as smaller marketing firms or interior designers may need office space but not have the budget to lease out a full building to themselves. In this instance, they can lease a smaller space within a larger building.

3. Retail

Retail real estate includes any property that is used to sell goods and services. This asset class includes shopping centers, restaurants, convenience stores, gas stations, pharmacies, daycares, and storefronts, among others.

If a business occupies a space where they regularly sell physical products or provide on-the-spot services (such as massage or yoga studio), it’s likely considered a retail space.

4. Hospitality

Hospitality real estate includes any real estate business and property that caters to short-term guest accommodations, such as hotels, motels, and bed and breakfasts.

5. Industrial

Industrial real estate includes buildings that are used for—you guessed it—industrial purposes.

These can include warehouses, factories, refrigerated storage facilities, refineries, and more.

6. Special Purpose

Special purpose real estate, also known as special use property, are one-off and unique properties that are built for a very distinct purpose which limits its market use.

For example, amusement parks, marinas, and movie theaters are all considered special purpose because they can’t really be used for anything other than what they are.

7. Undeveloped Property or Vacant Land

Undeveloped real property, also known as raw land and vacant land, is any undeveloped land that can become developed land with the support of investors and developers.

As cities grow and urban development sprawls, vacant land becomes rarer and rarer. As a result, some developers specialize in identifying vacant land and raw land, acquiring it, and then building new buildings on it from the ground up.

What are the Different Types of Real Estate Investments?

It’s possible to make any type of real estate into a real estate investment. You can do this through active real estate investing and passive real estate investing, depending on your investment strategy.

An example of an active real estate investment is raising money to acquire a large multifamily property with other investors.

An example of a passive real estate investment is investing in a passive investment opportunity like Real Estate Investment Trusts (REITs).

REITs are companies that own, operate, and finance income-producing real estate. Shares of the company are publicly traded and can be a straightforward way to generate steady income that is completely passive.

Many REITs pick a specific real estate asset class. Some solely acquire residential properties at scale, others solely acquire a specific asset class of commercial properties, whereas others have a blended model. If you are considering investing in a REIT, be sure to conduct your research and due diligence before purchasing.